1. Interactive TV Snapshot July 2002

2. Interactive TV F Interactive TV is a topic of interest to many sectors of the TV and tech industry, including: - Software: OpenTV, Microsoft, Liberate, Canal+ - Consumer Electronics: Sony, Motorola, Sonicblue, TiVo, Thomson, Scientific-Atlanta, Matsushita - Semiconductors: Broadcom, ST Micro, LSI Logic, Philips, Motorola, National Semiconductor - TV broadcasters and service providers: NBC, AOL Time Warner, Viacom, EchoStar, Comcast

3. Applications * The local info channel can provide sports scores, a stock ticker, local weather, etc.

4. Drivers & Hurdles

5. One Theory of Application Attractiveness: Level of “Interactivity” Is Influencing Consumer Adoption

6. Consumer Interest in Applications F In-Stat/MDR surveys show that U.S. consumer iTV interest is highest for On-Demand video services and EPGs; lowest for T-commerce & chat *Cultural differences count in interactive TV: In Europe, apps requiring higher levels of interactivity are the most popular (gaming, multi-angled camera shots, etc)

7. On-Demand Apps F Consumer interest high in VOD/SVOD and PVR services - Both services still being tweaked by service providers & CE manufacturers F Infrastructure is important for the availability / delivery of all interactive TV services, esp. On-Demand services - Digital set top boxes, middleware, two-way transmission capability, etc.

8. On-Demand Service Forecast: North American VOD and PVR Subscribers *Bottom line: Modest penetration for a couple more years By December 2002: 2.8m VOD subs and 1.5m PVR subs

9. Recent iTV Developments F Revenues from iTV Remain Sparse: Industry Consolidation & Reorganization Underway - Widespread closures among application developers - Mergers in middleware/service provider segment (e.g. Liberate / Sigma Systems; Liberty Media buying OpenTV & ACTV)

10. Recent iTV Developments F Greater Emphasis on Targeting Cable Subscribers for On-Demand apps, Local Info channels, EPGs - Digital cable subscriber growth is giving the interactive TV industry hope F Marketing interactive TV services is the next big challenge. Most iTV technology works – however, most app developers are still experimenting with: - application/service pricing - packaging - advertising - signing partnership deals with pay-TV service providers, etc.

11. Questions? Mike Paxton Senior Analyst, Converging Markets & Technologies In-Stat/MDR mpaxton@reedbusiness.com (480) 483-4462

12. Cable Industry Overview: Subscribers, Services, and Equipment July 2002

13. Cable Industry Update F Industry Trends F The Market: Subscriber Growth & Location Digital Cable Services u Key Points u Regional Expectations Cable Set Top Boxes u Forecast u Manufacturer / Component Issues u Trends u OpenCable Cable Modems F Questions

14. The Cable TV Industry Key factors shaping the industry:  Competition Satellite, Terrestrial Broadcast, DSL  Consolidation In US, “Big 7” MSOs control 85% of market  Digital Upgrades Infrastructure upgrades in North America; steady CAPEX environment for past several years

15. The Market: Modest Subscriber Growth in US, Stronger International Growth F U.S. Cable TV Subscriber Growth: - Jan. 2000: 67.3 million - July 2001: 68.5 million - Feb. 2002: 69.2 million (1.4% annual growth) F Worldwide Cable TV Subscriber Growth: - Jan. 2000: 274 million - July 2001: 289.8 million - Jan. 2002: 299.7 million (4.8% annual growth)

16. Where Are They?

17. Digital Video Services: Key Points u Strong Digital Cable TV Subscriber Growth where it is available - 15.2 million subs in the U.S. (April 2002) - Approximately 7 million in ROW, primarily in Canada and the U.K. Ô Cable MSOs emphasizing digital video services due to increased RPS and “triple-play” packaging opportunity u Cable infrastructure upgrade process has provided a good market for the “leading” equipment manufacturers u Digital Cable video service still lagging behind Satellite in total subs

18. The Race for Digital Subscribers: Cable Still Chasing Satellite Forecasted Growth through 2005

19. The Cable “Triple-Play” The Industry’s Secret Weapon â The “Triple-Play” consists of: 1. Video (either digital or analog cable TV service) 2. Data (broadband cable modem access), and 3. Voice (cable telephony) â Arguably the Industry’s Strongest Marketing Move Since the Introduction of “Premium” Channels The Triple-Play has allowed the cable industry to: - differentiate itself from other pay-TV services (DBS) and other broadband service providers (ILECs) - reduce subscriber churn - increase average revenue per subscriber

20. Cable Set Top Boxes â Digital Cable Set Top Boxes Rule: Analog and Advanced Analog Cable Set Tops Slowly Disappearing Historical Worldwide Unit Shipments: Digital Cable Set Top Boxes

21. Digital Cable Set Top Issues: The “Thick vs. Thin Debate” Digital Cable Set Top Box Unit Shipments: Thick vs. Thin (000s) * As of May 2002, Motorola had shipped 300k DCT5x00s * Scientific-Atlanta started shipping the Explorer 8000 this month è For the next two years, we expect “thin” boxes to remain the type of box that MSOs demand

22. Digital Cable Set Top Box Manufacturers * Motorola Broadband and Scientific-Atlanta Still Dominate Manufacturer Market Shares Digital Cable Set Top Box Unit Shipments, 2001

23. Digital Cable Set Top Issues F Household Penetration of Cable Set Top Boxes Remains Low - Remember: 1 cable TV sub does not mean 1 deployed cable set top box - Today in the US, only 40% of cable TV subs have a cable set top box in their home - Internationally, this number is in the single-digits F Increasing availability of advanced digital services will raise the percentage, but only marginally

24. Digital Cable Set Top Issues: The “Thick vs. Thin” Debate - Thin Digital Boxes: DCT2000, Explorer 2000 ASP: $220 - $275 - Thick Digital Boxes: DCT5X00, Explorer 8000 ASP: $425 - $600 Ô MSOs are interested in thicker boxes, but they are still experimenting with business models (Interactive TV, esp. PVR & VOD services) and trying to lower the cost of deployment. At the same time, thin boxes are becoming more capable.

25. Digital Cable Set Top Issues F Digital cable set tops remain a good market segment for semiconductor manufacturers, although component ASPs are decreasing steadily F Semiconductor content trends: - Decreasing costs for chip content in existing cable set top models - Increasing DRAM & Flash content - Processor module has integrated MPEG-2 decoder, NTSC/PAL decoder functions - A few suppliers dominate the market, especially Broadcom F Digital Cable Set Top BOMs (industry average): - Thin box: $130 - Thick box: $280 (w/ HDD)

26. Digital Cable Set Top Issues F Moderating Demand & Decreasing Cable Set Top Unit Shipments - Cable MSOs: Tightening control over set top box inventories, focusing on reducing digital churn rate. Sparse demand outside of North America. - Cable Set Top Manufacturers: Over the past three years, worldwide digital unit shipments increased an average of 78% per year. In 2002, we are forecasting a 30% decrease in annual unit shipments of row. - Still, volumes remain substantial: 14.3 million units shipped last year. 3 Between 2003 and 2005, annual growth rates will average about 4%.

27. The Mystery of OpenCable F OpenCable was designed to allow cable set top boxes to be sold at retail (part of 1996 Telecomms Act) F Deadline for compliance: July 2000 F Cable industry states that they complied with the letter and the spirit of the law by developing an OpenCable standard, but there are few boxes available - Box makers say retailers aren’t interested in their product - MSOs have problems with the POD module - CableLabs still tweaking the middleware standard - No FCC or Congressional pressure! - Consumers really don’t give a damn  In-Stat’s view: OpenCable is dead, or at best dormant

28. Cable Modem Service F Cable Modem service expanding rapidly - 12.3m worldwide subs at beginning of 2002 - Should surpass 17m by end of year F U.S. has the majority of subscribers: 8.1 million as of June 2002 F Other hot spots include Canada, South Korea, Taiwan - Demand in Europe still soft: currently around 600k total subs

29. Cable Modems Worldwide Two-Way Cable Modem Unit Shipments (000s) Ý Unit shipments declining slightly as subscriber growth levels off Ý ASPs falling substantially (current BOM: $45-50)

30. Cable Modem Manufacturers F Highly competitive market segment. Standardized (DOCSIS) high-quality products, relationships with MSOs very important F Several manufacturers have left the market due to thin margins: Lucent, Nortel, 3Com, Ericsson F Current Market Share Leaders (April 02): - Motorola 29% - Toshiba 22% - Thomson 16% - Scientific-Atlanta 9%

31. Questions? Mike Paxton Senior Analyst, Converging Markets & Technologies In-Stat/MDR mpaxton@reedbusiness.com (480) 483-4462